- Momentum hates trends chopping and changing.
- But my classic blue-chip momentum screen hasn't minded the many changes of sentiment in 2021.
- 10 new longs and shorts as investors prepare for the dawning of a new year.
When markets gyrate, momentum strategies can often be thrown off course. That’s because at such times momentum investors (buying stocks that have been performing well) can find themselves attached to a trend that has reached its zenith and plummeting with it back to earth as sentiment abruptly turns.
We could be at a moment of changing sentiment now. Markets have recently lurched lower with many hot stocks taking a cold bath.
The timing of the quarterly Blue Chip Momentum Classics screen could, from this perspective, prove fortunate. We may see the screen switching trends before damage to dominant themes gets too severe. Unfortunately, my crystal ball is at the menders so this is nothing but fluffy speculation.
What can be said with a bit more certainty is that at the time of writing, the long and short portfolios selected about three months ago have done pretty well. There’s been some decent outperformance from the longs and underperformance from the shorts.
|Name||Share price return (15 Sep - 2 Dec 2021)||Name||Share price return (15 Sep - 2 Dec 2021)|
|Croda Int.||7.9%||Associated British Foods||5.3%|
|Rightmove||1.5%||Int. Cons. Airlines||-2.8%|
|J Sainsbury||-3.1%||Smith & Nephew||-6.1%|
|JD Sports Fashion||-5.6%||Pearson||-20%|
The market has oscillated between themes for much of 2021. We began the year with the embers of the 'value rotation' dictating the pace. There was then a switch back towards familiar 'quality' themes, and latterly 'growth' investing seemed to get the upper hand. That was until a bit of recent hawkishness by the US Federal Reserve and the surfacing of a new coronavirus variant of concern prompted a bit of a sell-off.
Maybe some bloodletting is healthy after what has felt like a somewhat febrile 12 months. But much of the most giddying evidence of exuberance is in non-mainstream assets such as crypto, NFTs and meme stocks. For all those involved with such trades, I do hope I am wrong in my cynicism about much of this activity.
But from the perspective of my Blue Chip Momentum Classics screen, 2021 has been a decent year. In fact, I’d go further and say it’s been a textbook example of what momentum is meant to do. The longs have been outperforming pretty consistently while shorts have been doing the opposite. One-year figures can be seen in the accompanying performance table charting the screen over several different time periods.
|Since June 2007||205%||-10%||4.6%|
Source: Thomson Datastream/ S&P CapitalIQ/ FactSet
There are a few important things to note with the way I monitor this classic momentum strategy. In the real world dividends make up a key portion of returns for investors and costs are a major detractor. This is why for most of my screens featured in this column I always look at total returns (returns assuming all dividends reinvested) and factor in notional costs of rebalancing portfolios. This is done even though the screen results are themselves intended as a source of ideas for further research rather than off-the-shelf portfolios.
But with classic momentum my approach is different. Performance data is kept very much in the realms of fiction. It's there just for the joy of seeing the well-documented momentum phenomenon unfold from quarter to quarter. The data is based only on share price performance (so-called capital returns) and does not take any account for quarterly costs. Indeed, the extensive research undertaken into momentum suggests that costs substantially erode any excess return from the strategy.
One other caveat with this month's screen is that the timing of publication means it has been necessary to look at momentum over a shorter period than the official three-month period which stretches to 15 December. That means the official portfolio of stocks that will be monitored in future updates may differ from the 10 longs and shorts presented below.
The screen itself simply picks the 10 best-performing FTSE 100 shares from the past three months as 'longs' for the coming quarter and the 10 worst-performing as 'shorts'. Details can be found in the tables at the end of this article and I’ve taken a bit of a closer look at the three top-performing longs.
Rolls-Royce (RR.) is a far more familiar name to this screen as a short pick than a long pick. The business model for much of the company’s operations is to sell aeroplane engines at a loss that have highly-profitable servicing contracts attached. The idea is to use the service contract to recoup the initial loss plus much more beside.
The trouble is that it is very hard to price these deals well due to the unpredictability of the number of flying hours each engine will see. This has not been helped over the years by engine design faults. However, a bad story got a lot worse over lockdown when many planes were grounded. With over half of sales linked to civil aviation, the shares tumbled as cash outflows mounted and debt soared.
The cathartic moment for the company occurred in September last year as new bonds and shares were hawked to head off impending doom. It also promised to cut £1.3bn in cost and sell £2bn-worth of non-core businesses. It is progress on these latter points that has helped power the shares higher over the last three months.
Indeed, in the period no less than three disposals were announced and the company is now expected to beat its £2bn target once the deals go through. Costs are also falling fast, with Rolls drastically cutting staff numbers. Of its 52,000 employees, 9,000 are being shown the door. Half-year results in September, meanwhile, confirmed the company is on track to achieve over £1bn in savings this year.
There has been good news of a more expansive variety, too. The company unexpectedly announced a $2.6bn contract with the US military for B-52 engines. It has also lined up over £300m from the UK government and two private companies to develop small modular nuclear reactors (SMRs). It is hoped the SMRs investment will allow Rolls-Royce to use its expertise in making small reactors for Royal Navy submarines to break into what could be a lucrative new market.
SMRs come at about a tenth of the price of standard nuclear reactors. What’s more, the need for zero-carbon energy solutions means many politicians are overcoming previous objections to nuclear power based on safety and waste-disposal concerns.
The company has a trading update scheduled for 9 December. This falls in the period after the writing of this article, but before the official end date of the screen’s quarterly monitoring period. That means the company has opportunity to either cement its position as top of the pops, or serve up some of the disappointment its shareholders have so long been used to.
Shares in online car-listing site Auto Trader (AUTO) surged on the back of the publication of its half-year results in November. The excitement did not just reflect numbers that came in ahead of expectations and a consequent bump up in brokers’ forecasts. Sure this helped, but trading in the six months also underlined deeper virtues of the strategy Auto Trader has been pursuing.
While demand for cars has been strong this year, life has not been altogether easy for Auto Trader’s customers; car dealers. The global chip shortage has meant reduced supply of new vehicles. This means there is simply less to sell even if the job of making sales is easy. Indeed, volumes of cars advertised by AutoTrader were down 9 per cent in the first half.
Not a problem, though, because the company has been focused on increasing average revenue per dealer and there are encouraging signs the strategy is a winner. Indeed, by offering fancy ad-package upgrades, the company managed to increase average revenue per retailer per month by 13 per cent to £2,199.
This looks very similar to the hugely successful model of property-listing website Rightmove. Like Rightmove, Auto Trader boasts a strong “network effect”: the more people visit its site, the more worthwhile it is for advertisers to put listings on it, and the more listings there are, the more worthwhile it is to visit. A virtuous circle of value creation.
Auto Trader also saw lower customer churn in its first half. This could point to another strategic success linked to its decision to offer discounts to customers during the depths of lockdown. It may also point to the increased importance of having an online presence to car dealers, as Covid-19 has moved many buyers online.
It has been a year of real ups and downs for the share price of international banking giant HSBC (HSBA). The shares started the year on the up. The stock was buoyed by the prospect of a post-lockdown recovery around the world and enthusiasm for a new boss’s plan for an “Asian pivot”.
However, challenges lay ahead. There was the spread of the Delta variant in Asia. And also the crackdown on lending to Chinese property companies. Tightening credit conditions in the country were underscored by the high-profile collapse of Evergrande. Sentiment was not helped by the fact that HSBC funds increased their exposure to Evergrande bonds before its demise. These events took the shares from a high point of 455p, all the way down to 360p.
The low was hit just around the start of the three-month monitoring period used by this screen. Since then, the mood has turned more upbeat again.
Part of the turnaround is likely to be related to a calming of fears about the systemic risk posed by the Evergrande collapse. There were shrill comparisons with Lehmans being made in September but this quickly dissipated.
Still, there are genuine reasons to worry that Chinese policies focused on curbing real estate credit and reducing inequality could have long-term implications for a company that derives one-third of its profits from Hong Kong. All the same, fears need to be put into perspective against the fact that of its $1tn loan book, HSBC’s exposure to China is $194bn and of that only $19.6bn relates to real estate.
Significant positive global news for the bank has come from the increased hawkishness of the US Federal Reserve. It looks like monetary policy could tighten faster than expected. While this has some negative implications for potential economic growth and capital flows out of Asia, the prospect of higher interest rates means HSBC’s profitability stands to improve.
More specifically to the bank itself, third-quarter numbers that were reported in October were a source of encouragement. HSBC substantially beat broker forecasts with an underlying profit of $5.4bn, which was up from $3.1bn the previous year and compared with expectations of $3.8bn. That was impressive even after taking account of the fact that $659m of the improvement was a result of the company reversing provisions it had made for loans going bad as a result of the pandemic. The company also reported a robust balance sheet, which allowed it to announce a $2bn share buyback programme.
And supporting the case for the Asia pivot, which will see $100bn of risk-weighted capital redirected, third-quarter performance in the region was strong, helped by substantial share trading by rich clients. As part of the bank’s performance improvement strategy, there are also plans for $4.5bn of cost savings from around the globe and 35,000 job cuts.
|Name||TIDM||Price||Market Cap||3mth Mom*||NTM PE||DY|
|Pershing Square Holdings||PSH||3,015p||£6.0bn||14.2%||-||1.0%|
|Royal Dutch Shell B||RDSB||1,608p||£124.0bn||10.7%||7||3.7%|
|Name||TIDM||Price||Market Cap||3mth Mom*||NTM PE||DY|
|London Stock Exchange||LSEG||6,752p||£34.2bn||-17.7%||23||1.1%|
* 15 Sep to 02 Dec